FTSE flirts with 7000 as weak manufacturing PMI weighs on pound

The FTSE flirted with 7000 whilst outpacing its European peers on Friday, thanks to progress in US – Sino trade talks and a weaker pound.
With the Chinese hailing great progress in recent talks and Trump calling for another meeting with Chinese President Xi Jinping the market is slowly coming around to the idea that the two sides could slowly be moving towards some for of agreement. For now, this is enough to lift sentiment. As we move closer to the trade truce deadline investors will want more evidence of progress to keep the markets buoyant.

UK Manufacturing activity at 30 month low
The pound dropped sharply in early trade, hitting a low of $1.3044, after data showed a lacklustre uk manufacturing sector. The UK manufacturing PMI dropped by more than expected to 52.8 in January, down from 54.2 in December. This is the second weakest reading since Jul 2016. The data showed a strong rise in stock piling in the first real signs that businesses are preparing for a no deal Brexit. The big concern here is that a good deal of this expansion is thanks to stockpiling by business ahead of Brexit. Without this stockpiling the figure would have been dismal. New orders are weak as the UK catches hold of the global trend for weakening manufacturing sectors. 

NFP smashes expectations; wage growth weak
The NFP report smashed expectations for a second consecutive month. 304K jobs were created in January, well above the 166K forecast. This is on par with December’s 312K. Yet whilst the headline figure impressed, average wages ticked just 0.1% higher, rather than the 0.3% forecast. Unemployment also unexpectedly rose to 4% up from 3.9%. However, this is down to US government workers being furloughed amid the US government shutdown.

This goldilocks report shows a robust labour market, without major inflation pressures which would cause concern for the Fed. In short, it’s just the sort of report that the Fed would want to see after its decision to pause rate hikes owing to “external pressures and financial developments”. 

Gains in the dollar are broadly muted. We learnt earlier in the week that the Fed chose to put hikes on hold despite acknowledging the strong labour market. A strong job creation number but weak wages increase, will not push the Fed to consider tightening policy again anytime soon. 

Gains in the dollar were evident versus the Japanese yen. The yen was also weakening on the back of trade talk progress, inspiring flows out of safe havens.